EURUSD Range More Attuned to Conditions than the S&P 500 Reversal From 200-Day SMA

S&P 500, Bed Bath and Beyond, VIX and EURUSD Talking Points:

  • The Market Perspective: S&P 500 Bearish Below 4,100; USDJPY Bearish Below 134.00; EURUSD Bullish Above 1.0100
  • An RBNZ rate hike couldn’t lift the Kiwi, the S&P 500 stalled at the 200-day SMA and recession fears are rendering limited traction on earnings
  • Liquidity remains my top priority in evaluating the markets, making more of a EURUSD range than a true S&P 500 reversal

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Keeping Track of the Speculative Winds

The liquidity-deflated markets continue to follow the speculative lines seemingly most tracked by the retail trader, and that isn’t likely to change until at least next week. Looking at the big picture and general mood of the market heading into Thursday trade, it seems that the lack of conviction common to the speculative rank continues to exert exaggerated influence over the tides. A technical test of bullish conviction was rejected pretty handily this past session. Despite the S&P 500’s most impressive bullish progress since September 2020 (according to the separation of spot relative to the 50-day moving average), a high profile test of the 200-day moving average around 4,325 would readily knock the benchmark index back. This doesn’t register as a full-fledged reversal, there was almost no follow through on the gap lower from the open. But it does reflect the shift in priorities to favor technical boundaries and deprecate the systemic fundamental risks when we are traversing the desert of seasonal liquidity.

Chart of S&P 500 with 50 and 200-Day SMAs, Volume, 50-Day Disparity and Daily Gaps (Daily)

Chart Created on Tradingview Platform

Where thinned markets can present a curb – as it did with the S&P 500 – it can also amplify other areas of the market. While the outperformance of the ‘growth’ oriented index Nasdaq 100 relative to the ‘value’ positioned Dow Jones Industrial Average faltered this past session, there remained an isolated appetite for the most recent Wall Street Bets phenom. Amid a -14 percent drop from AMC and -4 percent slip from GME, Bed Bath and Beyond (BBBY) rallied 12 percent through Wednesday. That doesn’t really encompass the ongoing, extreme volatility of this ticker currently traversing a short-squeeze. The session opened with a massive 30.5 percent gap and gained as much as 45 percent intraday all while notching another massive 260 million share trading session. This is not a reliable development by a long shot. Instead, it shows what can happen when the market’s more extreme appetites can channel volatility when liquidity is too thin to absorb it through normal channels. This is not my kind of market development, but I will continue to watch this as if watching a car crash unfold.

Chart of Bed Bath and Beyond with 20-Day SMA, Volume, 20-Day Disparity and 1-Day ROC (Daily)

Chart Created on Tradingview Platform

Seasonal Conditions are Bolstering the Influence of Retail Tendencies

This has been a point of discussion of mine for a number of weeks, but the seasonal influences expected around this time of year are exacting an exaggerated influence on price action. Historically, the swoon is not particularly unusual; but given the backdrop of such a significant slide in confidence through the first half of the year, the subsequent slow bounce stands out. That is perhaps contributing to labels like ‘the most hated bull trend’. With such a storied backdrop of fundamental issues, it seems incomprehensible that the market should continue to climb – resulting in what I often refer to as complacency. Yet, when market depth is thinned, the type of trader that remains tends to shape the environment. Taking a look at that seasonality, we can see below from the S&P 500 that the month of August is known for modest bullish performance and a rise in volatility (via the VIX); but participation is exceptionally low. In fact, when adjusted for trading days, August is historically the most reserved month of the calendar year for volume.

Chart of the Nasdaq 100 to Dow Jones Industrial Average Ratio (Daily)

Chart Created on Tradingview Platform

If we see professional, institutional and generally larger market participants – with longer durations and a preference for systemic fundamental matters – are happy to stay to the sideline, it stands to reason that more of the retail speculators’ influence can be expected to shine through in price action. That would go a long way to backing the S&P 500’s hold and retreat from its 200-day simple moving average (SMA) Wednesday. Notably, retail CFD traders at IG have been leaning against the run for a few weeks now. It is generally the case that we consider retail traders as a group to collectively have poor trade and money management habits, so we treat their collective view as a contrarian signal, especially at extremes. However, if market circumstances happen to match their predilections, their preferences shouldn’t be viewed as a something to lean against. While the bearish view on the S&P 500 wasn’t particularly decisive nor timely, combined with the 200-day SMA, the turn seems to fit.

Chart of S&P 500 Overlaid with IGCS Retail CFD Trader Positioning (Daily)

Chart from DailyFX.com with Data from IG

Now, moving forward, the hold and turn from the S&P 500 will no doubt raise some serious interest among traders. There will inevitably be those that see the technical correction as a cue for the kind of progressive turns that tend to grace trading textbooks’ pages. However, if the market is struggling to muster conviction for a breakout with follow through, is reasonable to assume that a reversal will muster anything more in trend? In general, range conditions seem to be more practicable given the backdrop. That brings me to another benchmark asset that has very well established and proximate technical boundaries: EURUSD. In other words, this most liquid FX pair has a very straightforward range. At the outer borders of its congestion, we are looking at a range from 1.0350 to parity (1.0000), but the price action has been more readily kept above 1.0125. Notably, the COT’s speculative futures positing is still heavily net short while the 25-day range is very narrow while realized volatility over the same period is still stubbornly high. In other words, a break is likely and there is pressure for a bearish resolution. Yet, in the meantime, this picture more readily fits our conditions.

Chart of the EURUSD with 50-Day SMA, COT Positioning, 25-Day ATR and Historical Range (Daily)

Chart Created on Tradingview Platform

What the Calendar Has to Offer Through the End of the Week

Eventually, the market’s interests/concerns around recession risks and possible accelerated rate forecasts will urge us back into a clear trend. In the meantime, event risk will more likely spur volatility without tapping the deeper vein. This is especially true with anticipation shifting our view out to next week through the Tuesday August PMIs for the developed world as well as the Jackson Hole Economic Symposium from Thursday through Friday. From the docket this next 48 hours, there is notable event risk between US existing home sales and FOMC member speak, Australian employment, Canadian upstream inflation and retail sales, Japan CPI and UK consumer confidence. All of it interesting, but its likely impact on the markets will not be truly registered until the market has enough backing to communicate the fundamental signal.

Global Calendar of Top Macro Economic Event Risk for the Next 48 Hours

Calendar Created by John Kicklighter

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